The need to target a sizeable passive income for retirement has never been greater than it is today. That’s my view, at least. And it’s not just because the UK’s buckling under the twin weights of soaring public debt and a rising elderly population.
At his Downing Street coronation last month, Andy Burnham made fixing social care his number one priority as Prime Minister. A necessary step, in this Magpie’s view. But it’s one that creates enormous potential risks for future pensioners.
Some of the measures mooted by political commentators and economists include:
- An end to the Triple Lock State Pension guarantee.
- Greater tax contributions from pensioners.
- A sharp rise in the State Pension age.
So how can pensioners protect themselves against against these threats? I think I’ve found the solution: and it involves investing moderate sums in a Stocks and Shares ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Wealth booster?
There are several great reasons why this strategy could work. All capital gains and dividends are protected from tax, which gives a significant boost to the compounding process.
The second is that withdrawals from a Stocks and Shares ISA are tax free. So unless there are any changes to tax rules, ISA investors will be protected in retirement from additional tax grabs.
And finally, by targeting equities and share-based funds, an investment ISA provides access to one of the most powerful wealth-building engines around: the stock market.
A £44k passive income opportunity
Stock markets are famous for being volatile at times. It’s a risk, but as a long-term investor I view it as just noise. This is because share prices largely rise over time. And some at a spectacular rate too.
Over recent decades, the global stock market has delivered an average annual return of around 9%. That smashes what cash savings have offered in that time. If this continues, a £500 investment in a Stocks and Shares ISA each month would turn into £735,372 in the next 30 years.
This could then be used in retirement to target a £44,122 annual passive income to supplement the State Pension. That’s based on investing in 6%-yielding dividend shares.
There are a few tactics investors can use to boost the returns they generate too.
A top value opportunity?
One I’m focusing on today is buying cheap stocks in my ISA and Self-Invested Personal Pension (SIPP). The idea is that quality, undervalued companies have greater scope for share price growth over time.
Topps Tiles (LSE:TPT) is one share I just bought on the cheap. Despite its dominant position in the UK tiles market, the penny stock’s trading near cyclical lows due to a weak housing and renovations market. That remains a big risk but was an opportunity I thought was too good to miss.
Why? Topps’ forward price-to-earnings (P/E) ratio has crumbled to 8.6 times. It also has an 8.6% dividend yield, which could throw off substantial passive income for me to reinvest in my portfolio.
I’m optimistic the company’s share price will steadily recover as market conditions improve, giving my retirement income a massive boost in the process.
Right now, I’m eyeing up several other top value shares to add to my ISA too…
Should you invest £5,000 in Topps Tiles Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Topps Tiles Plc made the list?
Royston Wild owns shares in Topps Tiles.
